UPDATE: Bank of America shareholders on Wednesday voted narrowly to strip Ken Lewis of his chairmanship. He'll stay on as president and CEO.
Investors don’t have a lot of confidence in our financial system, and with good reason. Bernie Madoff conducted his scheme right under the nose of regulators for 20 years. The big Wall Street firms imploded because they invested billions of dollars in toxic mortgage debt while telling the world they were fine. Ken Lewis and John Thain are two more reasons to stay out of the markets until further notice.
Both men have been in the news a lot lately. Thain, the former CEO of Merrill Lynch and ex-chairman of the New York Stock Exchange (where he earned the nickname “I Robot” because traders there thought he was impossible to communicate with), was fired by Lewis after Bank of America bought the once-storied brokerage firm during the dark days of the financial crisis last year and discovered things were a lot worse at Merrill than he thought.
Watching these guys go at it is kind of like watching old World War II footage of battles between Germans and Russians; you want them both to lose.
Since that time, they have been bickering—much of it in public—about who knew what and when about the huge losses Merrill announced to investors after the deal closed and the now-infamous bonuses that were paid out just before that announcement.
Both men have given testimony to New York Attorney General Andrew Cuomo, who is investigating the bonus fiasco, and from what I gather, each is praying that the other somehow gets charged in the matter. Wall Street is taking sides; there are those who think Lewis can’t be trusted and has a history of dopey deal-making (he bought troubled mortgage lender CountryWide Financial before Merrill) and others who say a stunt like paying out bonuses before the losses are announced is something Thain wouldn’t think twice about doing. And Bank of America’s shareholders will have their say today when they vote to decide whether to keep Lewis as CEO.
I’m not taking sides. In fact as far as I’m concerned, watching these guys go at it is kind of like watching old World War II footage of battles between Germans and Russians; you want them both to lose. To understand why both men should be treated by investors as if they are about to spread the swine flu, you have to go back to some time in the late summer-early fall 2007. Back then, Merrill wasn’t imploding, but its investment in toxic mortgage debt was becoming well-known on Wall Street. Still, I'm told by people with direct knowledge of the conversation that Merrill’s then-CEO Stan O'Neal went to his board and told them Lewis would offer $90 a share for Merrill Lynch (nine times what it eventually would eventually agree to pay).
Merrill’s board rejected the offer because they thought it was too cheap, these people say. O’Neal was eventually fired for the losses tied to those mortgage investments and replaced by Thain, who, after rewarding himself with a new $1.2 million office complete with a $35,000 “commode” as previously reported by The Daily Beast, he began cutting costs so Merrill could live within its means and assuring Wall Street that he had everything under control. Throughout the next year, Thain’s public statements were continuously contradicted by the facts: He said Merrill didn’t need to raise more capital to plug holes in the firm’s balance sheet when it did. He said the firm was on the way toward repairing its damaged balance sheet when it wasn’t.
A year later, with O’Neal gone and Thain in charge, Merrill President Greg Fleming once again revisited the possible deal, then sending out feelers to BofA about a possible merger several days before the Lehman Brothers meltdown weekend, probably because he knew Lewis’ lust to grow BofA into a major global investment bank, based out of Charlotte, N.C., would obscure his business judgment.
These accounts undermine the popular myth that Thain brilliantly sold the troubled Merrill to a healthy suitor. Sorry John, it was Fleming who pushed for the deal while you were weighing hookups with Morgan Stanley and your old firm, Goldman Sachs. But they also contradict the notion that Lewis was misled and then forced into buying Merrill by a lack of time to perform due diligence on Merrill's troubled assets or because of arm-twisting by Fed Chairman Ben Bernanke and then-Treasury Secretary Hank Paulson. Lewis had a full year to think about Merrill, and the last time I looked, he didn’t work for Bernanke or Paulson, but BofA shareholders.
Those same shareholders who will be voting today on whether to keep Lewis in the aftermath of the Merrill fiasco and his leaked testimony about how he feels Bernanke and Paulson forced him consummate the deal even though he knew it wouldn't be good for the company. People on Wall Street give Lewis a 50-50 chance of surviving. I say the odds are less for this reason: Say what you want about Hank Greenberg, the notorious hardass former CEO of American International Group, but I can’t see old Hank ever caving in such a way when he thought his decision would be bad for the people he’s ultimately responsible to—the shareholders—unless of course, Bernanke and Paulson owned lots of BofA stock.
As for Thain, one, thing is certain: His camp has taken enormous glee in Lewis’ unraveling, which says a lot about a man who professes to want to return to corporate America and run a public company. Thain’s public credibility is fairly low after the office fiasco but he is now spending office-size bucks on an image makeover. He used to have Washington spinmeister Margaret Tutwiler managing the press. That didn’t work out too well particularly after the “commode-office” story broke (it recently inspired a song by one of my favorite country singers, John Rich), so Thain went big time, hiring the firm of Sunshine Sachs, run by Ken Sunshine, a former flack for New York City Mayor David Dinkins, who now spends most of his time doing damage control for celebs like Leonardo DiCaprio and Ben Affleck.
As part of his makeover, Thain is also doing a lot of talking, giving a fulsome interview to The Wall Street Journal where we learned, among other salient facts, that he still puts on his suit and tie every morning even though he has no place to work and, oh yeah, he doesn’t like Ken Lewis. One interesting fact left out of the story: Thain, according to a spokesman, told the Journal that he didn't know he was being fired by Lewis until he saw the news on CNBC being broken by yours truly.
“Is he out of his mind?” was the question one high-level Goldman Sachs executive asked me when he discovered that Thain had gone Hollywood, and hired Sunshine. Thain, of course, used to work at Goldman when Paulson ran the show. He was Paulson’s No. 2, and even with that lofty position, I was told, he couldn’t use company money to splurge on an office. The Merrill office incident was such a un-Goldman thing to do. Not because he tried to use company money to purchase, among other items, a $1,400 wastebasket, but because he got caught.
Goldman, of course, is masterful at gaming the system and doing it out of the limelight. That’s why the firm has been so horrified by recent news that as it prodded the Treasury Department (and its former CEO Paulson) to bail out AIG, it was also bailing out itself because the firm stood to loose billions of dollars if AIG went under.
And that’s why the people there are nearly equally horrified that investors know that John Thain was once a heartbeat away from becoming Goldman’s CEO. “He should just make all this go away and I don’t know how Ken Sunshine does that,” the senior executive told me. I think it was the first time I agreed with anything coming out of Goldman Sachs in my entire career.
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later this year.